Senator FARRELL (South Australia—Parliamentary Secretary for Sustainability and Urban Water) (21:10): I thank senators, including Senator Macdonald, who have contributed to this debate on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. I particularly welcome the willingness of senators on the crossbench to consider these bills on their merits. Every independent member of the House of Representatives has done exactly the same. The crossbench has recognised the importance of this government's reform to support Australia's future prosperity. This is in contrast to the detractors, who have held the same course for over two years, distorting the intentions of the legislation and rejecting the evidence that supports it. They have had every chance to stand up for reform but they have simply ignored the beneficial changes and chosen to stir up fear. We heard a bit of that from Senator Macdonald a few moments ago.

The opposition continues to support measures that will add to the government outlays. It has no interest in tackling the real problem: the growing discrepancy between our innovation goals and our R&D tax incentives. In opposition, it seems there is no need for policy coherence. We need a research and development tax incentive that is fit for purpose—a mechanism that responds to the real needs of firms in the modern economy. The R&D tax concession was an important Labor reform in its day, championed, as I am sure you would know Mr Acting Deputy President Back, by the late John Button.

The world has changed over the past 25 years and so has the way in which businesses operate. What has not changed is the imperative for innovation. Australia's productivity performance has not improved over the past decade. The growth in our wages and living standards is largely the product of the resources boom, which I am sure, Mr Acting Deputy President, you are aware of in your home state of Western Australia. If we want to maintain that growth we must lift the performance of our firms. Innovation-active businesses are twice as likely to increase their productivity and 41 per cent more likely to increase profitability than businesses that shy away from innovating. Innovators contribute much more to Australia than just profits. They are more export orientated, they create more jobs, they generate new skills and they give more back to society and the environment.

So how do we encourage firms to invest in themselves? We are not the only ones treading this path. International competition to attract research and development investment is intense. We have to face up to the weaknesses of the existing R&D tax concession. John Button's legacy has been decimated as the concession's effective level of support has plummeted from 24.5c in the dollar to the current level of 7.5c in the dollar. This is simply not sufficient to influence decision making in many firms that might otherwise seize the opportunity to lift their performance. After taking up the reins in the new innovation portfolio, Senator Carr consulted widely on how we might best focus that support through an independent review and a national innovation system. The resulting report, Venturous Australia, which I expect you have read, Mr Acting Deputy President, recommended the introduction of the R&D tax credit. In Powering ideas, Australia's first long-term innovation strategy, the government accepted that recommendation.

These two documents, Venturous Australia and Powering ideas, provide the framework of the bills that we are debating today. They have been further strengthened by extensive consultation with industry and the research community. The government has taken every opportunity to engage stakeholders, includ­ing three rounds of public consultation and a Senate committee process. I acknowledge in this chamber those of my colleagues who contributed to the report of the Senate Economics Legislation Committee in 2010, including of course Senator Hurley, who is now retired from the Senate. She contributed very significantly to that report and took a great interest, I might add, in the subject matter of the report.

In response to constructive suggestions raised during the consultation—and we did not get any of those from the opposition—improvements have been made to the program design, attracting even more advocates in industry. This is an R&D tax incentive for the 21st century, an incentive that will unlock talent wherever it lies. The new R&D tax credit is inclusive. It is designed to support those firms no matter the type or stage of technological development and it will support them at a more generous rate. That maximises our opportunities, particularly opportunities in the clean technology race, which are a major priority for this government. Many Australian firms are set to benefit from the clean technology investment boom triggered by the government's Clean Energy Future package. The new tax credit will allow them to access those opportunities by undertaking more R&D projects, with the potential to reduce carbon emissions. This will contribute to a more sustainable use of our resources, transforming industry and contributing to improved environmental outcomes. But, regardless of the market firms wish to target, these increased benefits will act as a beacon to bring them into the innovation system.

Under the new R&D tax credit, assistance to small and medium enterprises will double and they will be entitled to receive cash refunds if they do not have the liabilities against which to pay their tax offset. This is critical for cash-starved small firms and will provide innovative start-ups with the cash flow that they need to invest in research and development. Eligible companies with a turnover of $20 million will have access to a 45 per cent refundable R&D tax credit, equivalent to a 150 per cent tax deduction. After allowing for the normal tax deduction that the credit replaces, this doubles the base of the rate of government support compared with the R&D tax concession, which was only available as cash in quite limited circumstances.

It would be wrong to suggest only small and medium firms will benefit from the new R&D tax credit. Larger businesses—those with a turnover of $20 million or more—will also receive increased rates of support through a 40 per cent non-refundable R&D tax credit. This raises the base rate of the government assistance by a third, equivalent to a 133 per cent R&D tax concession. This new tax credit also has a simpler eligibility criteria, with two clearly identified categories of eligibility that will attract support—core R&D activities and supporting R&D activities. This will ensure support flows to genuine research and development.

The new definition of core R&D activities requires identifying a knowledge gap which is then solved by means of an experiment proceeding from the hypothesis to an outcome by employing a systematic progres­sion of work. The Senate Economics Legislation Committee, which I referred to earlier, reported results in the adoption of two amendments that clarify the extension of the tax credit to experimental activities for the purpose of generating knowledge in the applied form of new or improved materials, products, devices, processes or services. The government recognises that the experiments can and do occur in a range of settings in the laboratory and all the way through to normal production.

So let me be clear on this: the new tax incentive supports both research and experimental development, including a production environment. While certain activities are excluded from the core R&D activities, they can still qualify as supporting R&D activities if undertaken for the dominant purpose of supporting core R&D activities. Supporting R&D activities are those activities directly related to core R&D activities. If a supporting R&D activity results in production activities or activities listed on the exclusion list, they must be undertaken for the dominant purpose of supporting core R&D activities in order to be eligible.

I would like to conclude by saying that the government is presenting a considered and comprehensive reform program that will transform the way this nation does its business. It is very much a regret that the opposition persists in its attempt to gut this legislation and with it the country's hopes for the future. I am nevertheless confident that the spirit of reform can win through in this parliament and throughout the business community. This is the moment for all of us to turn from baseless fears and consider the part these bills can play for building a richer, fairer and greener nation. As a result, I commend the bills to the Senate.